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In the 1990s, most of the Central and Eastern European countries (CEECs) went through
radical liberalization and adopted large-scale economic and political reform programs. These
programs included almost complete price, trade and capital movement liberalization,
macroeconomic stabilization, currency reform, and small-scale and large-scale privatization.
What is the role of the development of a legal and institutional infrastructure along with these
radical changes in society and the economy? The first part of this paper is based on the results
of an interview study of entrepreneurs and managers in Estonia undertaken in 1998 and in
Estonia, Russia, Finland and Sweden in 2000 in order to obtain their view of the behavior of
government agencies, lawmaking procedures and the operation of law enforcement
mechanisms.
The second part of this paper presents summary results from interview surveys of Estonian
manufacturing firms undertaken from 1994-2000. The surveys were designed to
quantitatively measure the state of and changes in the Estonian business environment,
focusing on the key aspects of financial contractual relationships of Estonian manufacturing
firms as well as regulation and dispute resolution mechanisms. Among the observations it is
noted that government regulations do not seriously affect business decisions regarding the
operation, expansion or closing down of Estonian manufacturing firms. A second observation
is that the Estonian court system is perceived as inadequate for resolving a substantial number
of disputes and conflicts among economic agents although legislation exists. Most firms rely
on mechanisms of self-enforcement when possible.
Journal of Economic Literature Classification numbers: K42, K49, G18, G30
Keywords: business environment, corporate financial relationships, enterprise restructuring,
corruption, law making procedures, law enforcement.

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Does wrongful conviction lower deterrence and can this explain society’s aversion to
sanctioning the innocent? This paper argues that for some of the most important
categories of crime such as murder, assault or robbery, the answer to both questions is
no. For these categories of crime, a potential offender need not fear wrongful
conviction for any particular criminal act he or she chooses not to commit. For
example, if a potential offender decides not to murder another person, he or she
should not fear being wrongfully convicted of it, since the person will not be dead,
and there will therefore be no investigation and no trial. He of she may risk being
wrongfully convicted of another crime, but that risk exists independently of his or her
own actions.
It may be argued that wrongful conviction lowers deterrence in more indirect ways.
First, the possibility of being sanctioned for a crime one does not commit may lower
the threat of being sanctioned for a crime one commits, if two sanctions are not twice
as threatening as one. Second, if wrongful conviction halts further investigations that
may lead to the true offender, and third, if a potential offender thinks that if he or she
does not take advantage of a crime opportunity, he or she may be wrongly convicted
in the event that some other person grasps the same opportunity. However, it will be
argued that wrongful conviction may also increase deterrence, and the three indirect
effects are in any event unlikely to be quantitatively important in the real world.
An implication of the present analysis is that society’s aversion to sanctioning the
innocent cannot be rationalized by or reduced to a concern for deterrence.

This paper discusses results and difficulties of comparing banks' performance based on
publicly available data for the case of Nordea, a pan-Nordic bank created through mergers of
important national banks. The objective of the performance comparison is to determine whether
Nordea's unique strategy of functional intergation across four countries can be advantageous. For stock-market data, however, Nordea does not have stable betas on risk factors, as illustrated by market betas, and thus the comparables method must be used with great care. The Nordea holding company performed about as well as the comparables, both in terms of stock-market and accounting data. Nordea banks in individual countries outperformed comparable holding companies; by arithmetic, Nordea non-bank operations are not as profitable as its bank operations. In event studies, the market views Nordea's acquisitions as adding value.

A constitution is more likely to be accepted if it federalizes those issues that are
widely seen as needing complete harmonization. A constitution is more likely to endure if the
federal government does not have powers that are not vital to it but which may alienate some
member states to the point that the federal government loses legitimacy. It appears vital to
have trade policy at the European Union level; for euro countries, monetary policy is already
federalized. It is not clear that common foreign and defense policies are needed; insisting on
common foreign and defense policies may lead to conflicts within and across member states
that severely weaken the Union, conceivably contributing to eventual collapse. Insisting on
harmonization of commercial codes does not have the destructive potential of attempting
completely to harmonize defense and foreign policies; it may, however, lead to needless
conflict that helps drain the reservoir of goodwill that the European Union will need for
dealing with other conflicts amongst member states.

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In 1992 the Cadbury Committee report on the financial aspects of corporate governance was
published. The Committee had been established following the failures of a number of high
profile businesses in the UK which had shaken confidence in the market. Some nine years
later, in 2001, the collapse of Enron sent shockwaves through the US market. As a result of the
Enron collapse and various other high profile scandals in the years since its occurrence, the US
is examining its own corporate governance structures and provisions to determine how these
might be improved and help avoid another Enron. The EU similarly is developing principles
and legislation to improve corporate governance, and scandals such as Royal Ahold and
Parmalat have helped drive further governance reforms.
In this paper we detail the development of corporate governance codes in the UK and the
adaptation of similar codes in the EU. We discuss the role of the financial sector in corporate
governance and how principles for regulation and supervision of the financial sector
complement codes of conduct and legislation in the area of corporate governance.
JEL Classification numbers: G34, G28, G22, G23
Keywords: corporate governance, financial sector; institutional investors.

Nordea is the first major international bank planning to operate important host country activities in branches as the Second European banking directive envisions rather than as subsidiaries. Nordea is the result of mergers of roughly equal-size universal banks in four Nordic countries with the intention to reap economies of scale and scope by providing services in an integrated organization. Nordea has so far operated under a legal structure with subsidiaries in the host countries. When the new branch organization is implemented, EU directives specify that the home country is responsible for supervision, regulation as well as deposit insurance. Supervisors in all involved countries are challenged by this prospect and they are negotiating to obtain an acceptable division of responsibilities. We argue that the Nordea case offers an opportunity to implement the EU's vision and to develop institutional foundations for substantial market discipline in banking. In particular, distress resolution and insolvency procedures for banks must be made rule based and credible for host country authorities to accept home country control.

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Abstract
We analyze firms’ incentives to cluster in an industrial district to benefit from
reciprocal technology spillovers. A simple model of cumulative innovation is presented
where technology spillovers arise endogenously through labor mobility. It is
shown that firms’ incentives to cluster are the strongest when the following three
conditions are met: 1) technological progress is rapid; 2) competition in the product
market is relatively soft; 3) the probability of a single firm to develop an innovation
is neither very high nor very low. We show that some trade secret protection is always
beneficial for firms’ profits and stimulates clustering. Excessive protection may
impede technology spillovers and reduce firms’ incentives to cluster.
JEL Codes: J3, K2, L1, O32, O34.
Keywords: Cumulative innovation, industrial districts, intellectual property rights,
technology spillovers.

Investors choosing a portfolio strategy, in order to secure a pension at a future date for
example, are faced with many uncertainties. One major uncertainty is the amount by
which their pension fund will be supplemented by personal savings from a variety of sources
such as life insurance contracts, bequests, or property sales. Over long periods of time these
uncertainties are likely to be large and difficult to hedge, and hence may have a significant
effect on the dynamic portfolio strategy. Drawing on the results of previous literature on the
reaction of investors to non-unhedgeable background risk, and on the theory of stochastic
dynamic programming, this article derives optimal strategies for investors maximising the
expected utility of terminal wealth, where this wealth consists of the value of a pension
fund plus accumulated personal savings. Numerical results, assuming that the market
portfolio and the expectation of personal savings follow (possibly) correlated geometric
Brownian motions, are derived to illustrate the effects of the size and uncertainty of the
personal savings, as well as the effect of the resolution of the uncertainty in them over
time. The computation uses a new technique for implementing the stochastic dynamic
programming. This involves a binomial approximation, in two dimensions, which ensures
that the computations are feasible for relatively long-term problems.

This article compares a set of often used simple contracts or mechanisms
in terms of how well they allocate decision rights between two
agents over time. A basic assumption is that agents incur a fixed cost
each time they renegotiate. The contracts or mechanisms studied are:
individual ownership and authority, the first-come first-serve rule, the alternating rule and the sign-up rule. One trade-off that arises is the
following: when usage of the asset is flexible in the sense that it does
not matter in which period it occurs, agents may rely on obtaining the
asset through arriving first at some point, while when an agent needs to
time and plan the use of the asset, he or she may wish to hold stronger
rights or to use the sign-up rule as a simple form of contracting.
(JEL:D10, D23, L22); Keywords: Incomplete contracts, individual ownership,first-come first-serve rule, costly renegotiation.

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Abstract:
Proponents of specific performance as a remedy for breach of
contract have found support in the alleged use of the remedy in
Civil Law countries. However, we provide evidence that specific
performance is in fact a rare remedy in Denmark, Germany and
France, and under CISG, when performance requires actions to be
undertaken, and we relate this to costs of enforcement. We argue
that it is administratively costly to run a system of enforcement
that renders specific performance attractive to the aggrieved party,
and that the Civil Law countries have (like Common Law countries)
chosen not to incur these costs of enforcement. This is especially
clear in the case of Denmark, where specific performance of actions
has been abandoned as a legal remedy.
At the normative level, we argue that enforcement costs provides
an additional rationale, over and above the rationales of the theory
of efficient breach, for damages and against specific performance
as the general remedy.

The New Economy is closely associated with computing & communications technology, notably
the Internet. We discuss property rights to, and trade in, the difficult-to-define intangible assets
increasingly dominating the New Economy, and the possibility of under-investment in these
assets. For a realistic analysis we introduce a Schumpeterian market environment (the
experimentally organized economy). Weak property rights prevail when the rights to access,
use, and trade in intangible assets cannot be fully exercised. The trade-off between the benefits
of open access on the Internet, and the incentive effects of strengthened property rights, depend
both on the particular strategy a firm employs to secure property rights, and the protection
offered by law. Economic property rights can be strengthened if the originator can find
innovative ways to charge for the intangible assets. The extreme complexity of the New
Economy and the large number of possible innovative private contract arrangements make it
more important to facilitate the use and enforcement of private individualized contracts to
protect intellectual property than to rely only on standard mandatory patent and copyright law.
Enabling law is one proposed solution. Current patent legislation in the US has led to costly
litigation processes weakening the position of small firms and individuals in patent disputes.
The property rights of such firms and individuals could be strengthened with insurance or
arbitration procedures.
Key words: Competence bloc theory, Enabling law, Experimentally Organized Economy, New
Economy, Weak property rights, Tradability, Underinvestment.